Slideshows | August 4, 2014

Seven surprising thinking traps for home buyers

Buying a house is so much more than getting a mortgage signed off and legal documents prepped.

The mind might wander to pondering what life might be like there in years to come. Will the commute to work be ok? Will friends visit? What will my neighbours be like? Will my family outgrow the space? With all the emotion involved, sometimes the more rational decisions of homeownership are skewed and buyers get carried away in the moment.

Is it too much house to handle?
Overconfidence coupled with the hope of buying a “dream home” is a challenging combination. Our surprising thinking traps for homeowners tells how overconfidence might lead people overstretch financially and end up taking a mortgage that is too large to cope with.
It can pay to step back and try to take an objective view. Gauge priorities (would I rather have a smaller house and be mortgage-free more quickly?). Stress-test personal finances to see if they stand up to the pressure of a rise in interest rates or the loss of a job.

 

1

But last night on the news...

Let’s say an item on the news reports that house prices have risen in the last month – then a buyer feels a rush to “get in quick” and buy now. But this buyer might be just feeling this way because the news is fresh and is falling for the availability bias thinking trap. A more realistic view might be taking price movements over a much longer period of time, several years or decades.

2

Don’t worry, I’ll be able to afford it

Overconfidence can be a reason why some people borrow too much when taking out a mortgage, an occasional paper by UK regulator the FCA says. Borrowers might benefit from a dose of reality from “stress testing” how their finances would hold up if interest rates hiked, household income fell or other financial emergencies strike.

3

I’ll pay what I always pay

The vast majority of Europeans who find it easy to pay their mortgage are not paying it back sooner, one of our surveys found. And this during a sustained period of very low interest rates in many countries. Some might have good reason but many others might simply be sticking with what they have always done – lulled into inertia – and be missing an opportunity.

4

My neighbours have it, so I want it too

A famous Dutch study suggests that if a neighbour wins a new car, others in the street are more likely to buy one too. It’s known as a peer effect – or keeping up with the Joneses – and means buying in a fancy area might end up with unexpected pressures on the wallet.

5

It’s easy to forget

Owning a property requires more than paying the mortgage each month. Repairs, insurance, taxes and other costs also need to be factored in. Renters may forget these extra costs (which they have probably been spared so far) will need to be paid once owning.

6

A house vs the index

Many people look at house price figures as a guide to market performance. But economist Chris Dillow blogs they are somewhat “irrelevant”, as the price of individual homes are much more volatile than an index.

7

It’s worth a million to me

If we own an item, we tend to value it more. This endowment effect has been demonstrated for small items, such as coffee cups, but has potential to make a large money impact if swaying home buying choices.

Personal financeEmotionBehaviourHouse buyingPeer effectsMortgageHouse pricesFirst time buyer

eZonomics team
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